Question

George W. Bush’s $168 billion tax rebate plan of February of 2008 was designed to stimulate the U.S. economy. This tax rebate did not work. Based on your knowledge of the Keynesian criticism to the neoclassical perspective and Say’s law, the likely reason the tax rebate did not work was because:

• A.

  it created a budget surplus.

• B.

  it was not big enough.

• C.

  people chose to save the tax cut or pay debts.

• D.

  other policies offset it.

Answer 1

Correct answer is (c) people chose to save the tax cut or pay debts

While theoretically it is effective to spur demand in the short-term, there is no certainty of an income tax cut translating into more spending on part of the consumers, as during tough times the tendency is to save more.

Under 2008 economic stimulus program, tax rebates were mailed or directly deposited into a taxpayer’s bank account. In most cases, the tax rebate will be $ 600 for individuals and $1200 for married couples. Those with dependent children will receive an additional $ 300 per child. Individuals earning more than $ 75000 and married couples earning more than $150 000 will get smaller tax rebates or no rebate at all.

As per a study by Shapiro & Slemrod, only 20% of the respondents were of the view that tax cuts would increase spending. Rest of the respondents either saved the tax cut or used it to pay their debts.The aggregate amounts of the rebates were large enough that they would have had a noticeable effect on the timing of GDP and consumption growth in the second and third quarters of 2008, even if only onethird of the rebates were spent.